Business Page – April 22nd, 2001

Today’s Business Page focuses on the New Building Society which holds its Annual General Meeting tomorrow at the Le Meridien, Pegasus. As a former director who was “proxied out” of the Society I expect accusations about “sour grapes” and self-interest. Indeed, this has already begun as a letter from O. Charles in yesterday’s Stabroek News indicates. For the information of Mr. Charles let me say that during my few years as a Director I never solicited or cast a proxy vote at any meeting of the NBS; I opposed increases in remuneration to Directors which I always felt was excessive; I argued for not opposing the earlier attempts to bring the NBS under the supervision of the Bank of Guyana; I was part of the effort to review and revamp the archaic Rules of the Society which unfortunately the Government is yet to act upon; I successfully argued that despite the security against which mortgages are made it was still necessary to create provision against debts going bad; and finally Mr. Charles, I never had any control of proxy votes whether for or against me.

No small fish

The Society is one of the largest financial institutions in Guyana with net assets of close to $14.6Bn. It probably has more customers than any other financial institution in the country and serves the important national function of mobilising savings and directing it into the critical area of housing. It has always been a very conservatively managed organisation and its growth has been impressive by any standard. Even as the economy stutters the Society’s assets and deposits bases have continued to grow. It has certainly been helped by the absence of competition and exemption from taxes. Its major competitor in the mortgage business is the GNCB Trust which has no such exemption and the NBS competes for funds with the commercial banks which are subject to Corporation Tax at the rate of 45% and to Minimum Corporation Tax.

Investors funds in shares and deposit accounts increased by 23 % from $12.6Bn. to $10.2Bn. Part of this increase came from 9,850 new customers drawn from the expansion of the Society’s operations across the country. Unlike mortgage accounts, the number of share/deposit holders is not disclosed. Investors’ funds account for 86.7% of the total assets of the Society, practically the same as the previous year.

Total assets increased by 21.53% from $11.98Bn. to $14.5Bn. Loans and advances increased from $6.1Bn. to $7.3Bn., a 20% increase over the previous year. The number of mortgage accounts in force at the end of the year were 3,608. The average amount per mortgage account was therefore $2.026Mn. Of the total assets just over 50% is invested in mortgages while 48% is held in local and overseas investments.

At 0.8% of loans and advances, provision for loan losses of $59Mn. appears very low. The Society has a very conservative policy on valuation of security but the property market is weak and there are few takers for the increasing number of properties coming on the market. The financial statements offer little help in this matter as it states only that “a general provision for loan losses has been set up to cover expected defaults on mortgages outstanding” Prudential banking and financial practices as embodied in the FIA require provision against specific debts as well as a general provision to cover default inherent in lending.

Interest income on lending increased by 21.6% while lending itself increased by 20%. The average interest rate therefore on lending was 11.7%. The accounts note that mortgage rates range between 5.5% and 18% but the reader is left to figure out the criteria for differential rates and indeed how much credit is devoted to various rates in the range. More importantly the accounts fail to disclose the Society’s policy in taking up interest on loans that are in arrears which is fundamental to its operations and surplus. Investments increased by 23.1% while investment income increased by 10.4%. The average return on investments was 11.8%.

While shares and deposits balances have increased by 23% interest expenses increased by 25%. The average interest rate paid was 9.3% which is considerably in excess of the rates which commercial banks pay because of the statutory deposit requirement and their liability to Corporation and Property Taxes.

Despite the considerably enhanced asset base, the inappropriate income for the year fell from $227Mn. to $205Mn.even after the positive effects of a change in accounting policy.

While the Report is an improvement over earlier years its late publication with its typographical errors, sloppy language and the absence of a meaningful Directors’ Report are inexcusable. How can shareholders seriously assess the stewardship of the Society when so little is said to them so late? While the report says that there are no significant concentration of risks, the reader is left to figure out that 13% of the borrowers account for over 30% of the loans and advances.

The Society operates under a law passed in 1940 and its Rules have seen little fundamental change since that time. Indeed some of its provisions would now be considered unconstitutional. The Rules clearly need major amendments to bring it into line with 21^st century realities. In many respects they mirror what was wrong with the country’s constitution: potential for abuse; discouragement of good governance; those in a position to make the change have a vested interest in the status quo.

While there is no immediate danger to depositors’ funds and therefore the viability of the society, Business Page cannot understand the reluctance of Bank of Guyana (BOG) to bring the Society under its supervision. The Society carries on banking business as defined under the Financial Institutions Act in that it accepts “deposits repayable on demand.” Accordingly it requires a licence issued by the Bank of Guyana to transact business. It is incomprehensible that the BOG is so reluctant to discharge its statutory responsibility to the nation and one has to wonder it will be necessary for a citizen to have the Courts compel BOG to assume its responsibility.

Supervision has costs including compliance with the many Guidelines issued under the FIA, one of the principal of which deals with interest recognition and provisioning. The Society will also have to comply with reserve and disclosure requirements but it will have the benefit of the discipline of inspection, reporting to an external body and stricter standards of auditing. It may argue that costs would go up and it would be unable to offer attractive rates of interest on both borrowing and lending.

One of the realities of the modern day business world is competition and an unwillingness to submit oneself to political influence and control. Across the market based economies building societies and savings and loans organisations are legally converting themselves into banks for that is what they are. It is becoming increasingly difficult to justify the current level of protection, the political control and the uneven playing field under which the Society operates.

There is a real fear that tomorrow’s meeting will be no more than a formality and given the block voting which brought the majority of the current directors to the Board, no one expects a robust discussion of the Report to be presented. Indeed, one of the Society’s most prominent and dedicated members has already decided not to attend the meeting as he considers it will be a waste of time. That would be a real pity.

One hopes that the directors will recognise this drift and will take serious steps to bring good governance into the Society. The Rules have to be amended and better financial and management practices adopted. Let us hope that the Society will not miss this opportunity. One also hopes that the Bank of Guyana will play its part by bringing the Society under the FIA where it legally should be. It is test for all of us.